Initial Costs for IFA....

TheTracker

savdefriz wrote: »

It seems that I have indeed provoked some discussion.....

Just so that everyone is aware, I have no problem with paying a "decent" fee to an IFA. My problem was, as I had only spoken to one IFA I had nothing to use as a comparison. I felt that the initial setup fees were high (2.66%), and that for a pretty simple portfolio 1% ongoing was also high. Bear in mind that I had no benchmark with which to compare this. My question simply stemmed from the fact that the "product" that I was advised upon was only predicted to pay 6.93% annualised and the fees would eat into that amount significantly.

I would have no problem with an IFA taking 1% if it meant that I was going to get a higher rate of growth, but I just felt that the extra level of charges were not proportional.

SDF

If you paid an IFA 2.66% up front and then 1% a year and you achieved a 6.93% annualised return before fees for 30 years then you'd turn every £1 invested today into £5.74. Without such fees it'd turn into £7.95, assuming you'd be able to achieve the same return without their pixie dust. In other words you'd be giving almost 32% of the growth to your IFA. Of course, factoring in inflation makes the situation even more dire.

bigfreddiel

TheTracker wrote: »

If you paid an IFA 2.66% up front and then 1% a year and you achieved a 6.93% annualised return before fees for 30 years then you'd turn every £1 invested today into £5.74. Without such fees it'd turn into £7.95, assuming you'd be able to achieve the same return without their pixie dust. In other words you'd be giving almost 32% of the growth to your IFA. Of course, factoring in inflation makes the situation even more dire.

The 6.93% was predicted it could be -6.93%, then how good do the figures look?

fj

bigfreddiel

masonic wrote: »

I think jem16 has pretty much debunked this, but if you just want to go and have a chat about your plan with an adviser and then trot off to a DIY platform and execute the resultant plan at risk, then I'm sure you could do that on an agreed hourly rate that doesn't depend on how much money you have to invest.

I like your thinking cheers fj

masonic

bigfreddiel wrote: »

The 6.93% was predicted it could be -6.93%, then how good do the figures look?

fj

A lot better than if you had gone DIY and got the same return, because a return of -6.93% per year over 30 years would almost certainly open up a mis-selling claim and refund, whereas if you had gone DIY, you'd just have to take the loss on the chin.

bigfreddiel

dunstonh wrote: »

For initial many can and do charge a flat rate. However, for ongoing, the problem is that many of our costs increase as the amounts go up. Insurance, the FCA, FSCS, FOS etc all charge percentage basis.

The larger the investment, the greater the liability and the greater the work.

Why exactly do larger investments require more work?

There must be some break points where the work doesn't actually change.

let's take portfolios of say £1, £10, £100, £1,000, £10,000, £100,000, £1,000,000, £10,000,000 and £100,000,000 would all require different advice and planning, but as the sum gets larger I cannot see any reason for handling the portfolio differently.

Perhaps some examples would illustrate this better

Cheers fj

bowlhead99

savdefriz wrote: »

I would have no problem with an IFA taking 1% if it meant that I was going to get a higher rate of growth, but I just felt that the extra level of charges were not proportional.

As another poster said, don't get hung up on it not buying you a better rate of growth and "paying for itself" in that sense.

In most cases I expect people aren't going to an IFA to find out how to earn 1% more a year to cover the fees, but simply how to to ensure that what they buy is suitable for their needs, while recognising that the time saved and the additional comfort gained, is better than the DIY or pure low-cost-index approaches. In other words, they won't expect to see an extra percent annual growth over what they had already projected for themselves for the first few years, they will just end up better off in the end after the economy has been through the ringer a couple of times.

In some ways you could draw an analogy with looking after a classic car. If you have a modicum of DIY aptitude and can identify a cheap mechanic service at a one-size-fits-all shop like Kwikfit who always claim to have a deal on... it might seem overkill to take it to a specialist for that particular model to give it an oil change inspection every six months and a full inspection every couple of years and nip every rust spot, sticking clutch, worn bit of rubber and 'funny knocking sound' in the bud.

However, the TLC from someone who is tailoring their service to the quirks of your rare car might allow the car to run for a very long life and be a dream to drive over a couple of hundred thousand miles with no reliability issues whatsoever.

The car would not actually go any faster so when you spend your £1000 on petrol and £200 on specialist routine maintenance you do not get to the individual destinations more quickly than if you had simply spent the £1000 on petrol and trusted that the oil would be good for another 10k miles.

So you might initially be happy that instead of TLC and constant fettling from the specialist, you preferred to save money by leaving it for seasons at a time without lifting the bonnet. The alternative of trying to DIY a full engine rebuild every few years and gradually replacing the bodywork with filler and every so often buy a whole new body when it gets too ropey to paper over the cracks, might seem fine.

But at some point you might find your cherished classic is beyond economic repair because kwikfit no longer have a service handbook for your Model T or '50s gullwing Merc and you have made more than enough mistakes over the years to risk trying to recover the latest combination of calamities. You would just sell it, cleanse your mind of the expensive money-pit that it had become, and get rid. Whereas you would still be driving a piece of historic motoring exotica for another couple of decades and 100k miles if you'd had it properly looked after.

In the same way, financial advice might not have a 'reward' in terms of return over the first few years; it might even seem to be giving you a lower return than the "managed index" approach from a rival offering. So it's perhaps a leap of faith because the actual gains (over getting a terrible result and bailing out for a loss or woefully inadequate return) may not be evident for a decade.

So, you have to meet with the IFAs and see what they have to offer and how, if at all, you might get comfortable with that for the cost. As some IFAs have said, the initial fee seems high, so shop around.

bowlhead99

bigfreddiel wrote: »

Why exactly do larger investments require more work?

There must be some break points where the work doesn't actually change.

let's take portfolios of say £1, £10, £100, £1,000, £10,000, £100,000, £1,000,000, £10,000,000 and £100,000,000 would all require different advice and planning, but as the sum gets larger I cannot see any reason for handling the portfolio differently.

Perhaps some examples would illustrate this better

Cheers fj

£1 spend it on something that makes you happy

£10000 put it in a high interest current account to get a guaranteed return that exceeds what is likely to be available from the equity or bond markets without a chunk of risk

£100000, does not fit in high interest current accounts, amount is less likely to be needed for emergency access, can use pension and ISA wrappers etc; can generally consider loss of access for further tax breaks e.g. JISA etc which wasn't worth it at £10k; but not likely to use significant quantities of higher risk assets such as VCTs and will not end up with a large exposure to any one sector after the cash is spread around;

£1,000,000, annual and lifetime limits become relevant when considering pensions as a tax planning tool; inheritance tax planning becomes relevant that probably wasn't at 100k; VCTs a strong contender due to tax efficiency and increased capacity for risk which wasn't there at lower levels; current accounts and mainstream retail products with "maximums deposits" do not use up a substantial portion of the total hence can't be used to substitute the fixed income component; , investor might already have sizeable invested assets of various classes to consider as part of total allocation even if not being managed by IFA; the typical annual capital growth of the holdings are well in scope of capital gains tax which was easily managed through annual exemptions at £100k

£10,000,000 a true "independently wealthy" level, able to open up all asset classes and sophisticated investor products in "alternative assets" arena; likely to have substantial commercial or business interests, DFM products will be relatively more affordable, etc etc.

I am not going to keep going with more examples because we know you are only trolling. If you genuinely don't understand why different services might be suitable for someone with £1 vs £1000, £10,000, £10,000,000 and everything in between without having an example of every single investment product that would be considered at every single wealth band... and if you're not quite sure whether the adviser really has greater £ liability when advising on £10m vs £10 and might want to charge commensurately more on the larger transactions...you are likely beyond the level of care that this psychiatric facility can provide.

cheers etc

Aegis

bigfreddiel wrote: »

Why exactly do larger investments require more work?

There must be some break points where the work doesn't actually change.

let's take portfolios of say £1, £10, £100, £1,000, £10,000, £100,000, £1,000,000, £10,000,000 and £100,000,000 would all require different advice and planning, but as the sum gets larger I cannot see any reason for handling the portfolio differently.

Perhaps some examples would illustrate this better

Cheers fj

It's not just about the portfolio itself, but about making sure all the other outlying matters are taken care of. For example:

• £1-1,000 - little to be done at this end
• £10,000 - ISA - rarely warrants an IFA
• £100,000 - ISA and maybe some direct holdings. Some care potentially needed in structuring if, for example, one spouse has significantly higher earnings than another. Also need to consider pensions as an option
• £1,000,000 - Getting complicated. Pensions are almost a must, offshore or onshore bonds may enter into the equation. This client may want a discretionary manager to look after their money on a much more proactive basis than an adviser can manage, so some appropriate recommendations may need to be made there. Inheritance tax now very much becoming an issue for discussion and monitoring.
• £10,000,000 - at this point it's rare to see a client with an advisory portfolio. Complex tax planning is a must, as is inheritance tax planning if the client wants to pass assets on appropriately. At this stage clients may well look to set up complex vehicles like trusts of varying natures, private OEICs or family investment companies, all of which need to be carefully managed on an ongoing basis as well.
• £100,000,000 - beyond complex, this is territory into which I have yet to venture. I'll let you know when I get there.

It's not necessarily going to be the case that all such clients require all of the above services, but it is very clear that larger portfolios bring with them serious additional complications and matters that require additional discussion, ongoing support and more reassurance that things are going well.

savdefriz

I think that at this point I should share more fo the details with you as the final installment was worth the wait!

The IFA had the first meeting with my wife only, as I was at work and unavailable at the time but said based on her risk profile he would draw up plans for us both.

At the second meeting (at which I was present) the IFA presented the plan to us, but got us to sign things there and then... I was a little naive but aware that in law I had a 14 day cooling off period, so that OH and myself could talk things through after the meeting.

One thing that was not explained to us in any detail at all was the ongoing service costs. The IFA had 4 different levels of service plan available which went from transactional only to full service plan. The most expensive option had been "preselected" for us (1%), and this involved a full service and face to face meeting every 6 months. A similar option, but with only one meeting every 12 moths was available (0.75%), as was a no face to face meeting but over the phone advice (0.5%).

After the meeting we talked things through but the preselection of 1% without explanation did not sit comfortably with us and so we decided to cancel all of the contracts, as we felt that the IFA failed in his duty to professionally explain the different options of service available.

Today I received a letter from the IFA in which he freely admits to pre-selecting the service plan as "he makes that assessment upon the work that is required and the risk that we represent" as "inexperienced and unsophisticated" investors. (I believe that is a technical term and not just an insult!!!!)

After all of this his final paragraph goes on to tell us that after reading his letter we should go out and buy a copy of the FT and use a pin to select a share and in the subsequent weeks and months when we've lost a sizeable chunk of our investement we would begin to understand the concept of risk v reward and that the charges of this IFA is worth it to stop you from losing your shirt.

In essence I think I made the right decision not to trust my money with that "professional"

SDF

Aegis

savdefriz wrote: »

I think that at this point I should share more fo the details with you as the final installment was worth the wait!

The IFA had the first meeting with my wife only, as I was at work and unavailable at the time but said based on her risk profile he would draw up plans for us both.

At the second meeting (at which I was present) the IFA presented the plan to us, but got us to sign things there and then... I was a little naive but aware that in law I had a 14 day cooling off period, so that OH and myself could talk things through after the meeting.

One thing that was not explained to us in any detail at all was the ongoing service costs. The IFA had 4 different levels of service plan available which went from transactional only to full service plan. The most expensive option had been "preselected" for us (1%), and this involved a full service and face to face meeting every 6 months. A similar option, but with only one meeting every 12 moths was available (0.75%), as was a no face to face meeting but over the phone advice (0.5%).

After the meeting we talked things through but the preselection of 1% without explanation did not sit comfortably with us and so we decided to cancel all of the contracts, as we felt that the IFA failed in his duty to professionally explain the different options of service available.

Today I received a letter from the IFA in which he freely admits to pre-selecting the service plan as "he makes that assessment upon the work that is required and the risk that we represent" as "inexperienced and unsophisticated" investors. (I believe that is a technical term and not just an insult!!!!)

After all of this his final paragraph goes on to tell us that after reading his letter we should go out and buy a copy of the FT and use a pin to select a share and in the subsequent weeks and months when we've lost a sizeable chunk of our investement we would begin to understand the concept of risk v reward and that the charges of this IFA is worth it to stop you from losing your shirt.

In essence I think I made the right decision not to trust my money with that "professional"

SDF

Ouch - sounds like you dodged a bullet there.